Quantitative Easing 2 – QE2

DEFINITION of Quantitative Easing 2 – QE2

The term QE2 refers to the second round of the Federal Reserve's quantitative easing program that sought to stimulate the U.S. economy following the Great Recession. Announced in November 2010, QE2 consisted of a further $600 billion in U.S. Treasuries, and reinvestment of proceeds from prior mortgage-backed security purchases.

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Quantitative Easing

BREAKING DOWN Quantitative Easing 2 – QE2

Quantitative easing was intended to stimulate an economy through a central bank's purchase of government bonds or other financial assets. Often, central banks use quantitative easing when interest rates are already zero or at near 0% levels. This type of monetary policy increases the money supply and typically raises the risk of inflation. Quantitative easing is not specific to the U.S., however, and is used in a variety of forms by other major central banks.

QE2 came at a time when the U.S. recovery remained patchy. While equity markets were upwards of 50% off their 2009 lows, the unemployment rate remain elevated at 9.8%, two percentage points of the Great Recession high. The fundamental reason behind round two was to shore up bank liquidity and lift inflation. At the time of the announcement, U.S. consumer prices were below 1% for the seventh consecutive month.

Interest rates initially rose after the announcement, with the 10-year yield trading above 3.5%. However, from February 2011, three months after the announcement, the 10-year yield began a two-year year decline, falling 200 basis points to trade under 1.5%.

QE2 was relatively well received, with most economists noting that while asset prices were propped up, the health of the banking sector was still a relative unknown. It was less than two years since the collapse of Lehman Brothers, and with confidence still low, it was prudent to promote investment through cheaper money.

Two years later, the Federal Reserve embarked on its third round of quantitative easing (QE3), something that was not as well received with many saying the balance sheet had expanded to an already lofty level and it was time to seek alternative strategies.

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